Beginner’s Guide to Trading Stocks
So after much prodding from that part of you which has digested the various material and newsletters about the stock market, you finally decide to take the plunge, but you realize that you have no real information about how to start off in the stock market as a beginner. This article is for you, and will give you some key information that every beginner in the stock market must know:
a) How to get access to the stock market.
b) Requirements for trading stocks.
c) How stocks are traded.
How to Get Access to the Stock Market
Can you imagine a situation where over one million beginners like you who want to trade the stocks listed on the New York Stock Exchange or the American Exchange, or some other global exchange that is open to traders from across the world, gather on the trading floor in person and start trying to buy stocks from other traders who have been in the market for years, numbering in the millions? It would be total bedlam. How can anything be done in the cacophony of voices, ensuring that no sharp practices occur and the trading is done in an orderly and timely fashion? That would just not be possible. That is why a system was created where traders who wanted to trade stocks had to go through a representative company, or individuals who work in such representative companies, as a means of harnessing traders into one place where their trades, money and the entire process could be managed in an orderly fashion. These representative companies could then come to the market place and meet other representative companies that also house clients like you, and they could now buy shares from, and sell shares to each other on behalf of all their clients. For this service, you would only be required to pay a token to that representative company. That was how the concept of stock brokerage was developed.
Nowadays with hundreds of millions of traders worldwide participating in stock exchanges around the world, stock brokerages represent the access point to the stock market. So the first step in starting the journey of trading stocks is by opening an account with a stock broker.
There are two types of stock brokers operating in the market today. We have:
a) Full-service brokers who provide an array of value-added services in addition to the conventional ‘buy and sell for me’ services rendered by brokers. They provide investment advice, portfolio management and sometimes, privileged news delivery services regarding virgin investment opportunities and market moving information. Their services are quite pricey, and for this reason, only those with a sizeable amount of cash can afford their services. These brokers also have a minimum benchmark for account opening balance, usually starting with thousands of dollars.
b) Discount brokerages offer stripped-down brokerage services. The unique selling proposition of discount brokerages as pioneered by Charles Schwab and others, is the very low brokerage fees that range from $4.95 to $9.95 per trade, irrespective of the number of shares being traded. However, this puts the onus of the extra services such as investment research solely in the hands of the trader. Discount brokerages allow traders open cash accounts for as low as $500 and $2,000 for cash/margin (leveraged) accounts. There are many discount brokerages and a search for them on the internet search engines will yield a plethora of names.
Requirements for Stock Trading
Having capital to trade is only one of the requirements. Traders must present documents to prove their identity and also to show where they live. These requirements became necessary after the September 11, 2001 attacks showed a lot of terrorist money being moved by third party/proxy accounts. So the fight against money laundering and financing if terrorism has been moved a notch by requiring all traders to be identified as the bonafide owners of the accounts that they trade with, and that the money they use for trading does not come from illegal sources. To this end, traders must present a drivers’ license/international passport/national ID card as proof of identity, AND a bank statement/utility bill as proof of residence. Some countries have also gone a step further to require that brokers operating citizens-only brokerages collect information concerning taxation status and residency status.
Furthermore, a trader will need to equip himself with the tools of the trade. A computer/smartphone and access to the internet are must-haves for every stock trader. Traders must also have an acceptable means of depositing funds and withdrawing funds from the stock trading account. A credit/debit card, domiciliary account for wire transfers or an e-wallet account such as Skrill are acceptable methods of transaction.
How Stocks are Traded
A stock can be traded by a long position, aiming to profit when the stock appreciates, and to a restricted extent, traded by short-selling the stock with the aim of profiting from a drop in price. Various methods of analysis are used to predict the movement of the asset.
In a nutshell, this is what a beginner who wants to trade stocks needs to know about the stock market. The actual business of buying and selling stocks is outside the scope of this article, but the information is accessible on other sections of this site.